Next Leg Lower Beginning? Setups for EUR/GBP, EUR/JPY, EUR/USD

Euro Outlook:

• Technical evidence is accumulating that the Euro’s resiliency is in the rearview mirror.
• A false bullish breakout may have transpired in EUR/USD rates, while both EUR/GBP and EUR/JPY rates have already started to push towards their monthly low.
• Per the IG Client Sentiment Index, each of the major EUR-crosses have a different bias.

Period of Resilience Ending

The Euro’s period of strength and resiliency at the start of 2022 may quickly be coming to an end. While EUR/USD rates experienced a bullish breakout earlier this week, there is growing evidence that the move is set to reverse. Coupled with a failure by EUR/GBP rates to advance meaningfully and EUR/JPY rates falling to fresh monthly lows, it may be the case that EUR/USD strength has masked problems elsewhere. With fundamental problems still abound – mainly, the European Central Bank’s refusal to raise rates in the face of high inflation – a fresh wave of Euro selling could be ahead.

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (January 2021 to January 2022) (CHART 1)

EUR/USD rates broke out higher from their two month-long triangle earlier this week, but did not advance meaningfully before resistance was met in a number of forms: the descending trendline from the May and September 2021 swing highs; the 50% Fibonacci retracement of the 2017 low/2018 high range; and the 50% Fibonacci retracement of the 2020 low/2021 high range. But perhaps most notably, the daily candlestick on Friday has taken the shape of a bearish outside engulfing bar, and coming in after a breakout, means its also a bearish key reversal. A move back below 1.1380 would offer a strong confirmation signal that EUR/USD’s bullish breakout as failed.

IG Client Sentiment Index: EUR/USD Rate Forecast (January 14, 2022) (Chart 2)

EUR/USD: Retail trader data shows 48.99% of traders are net-long with the ratio of traders short to long at 1.04 to 1. The number of traders net-long is 8.45% lower than yesterday and 13.32% lower from last week, while the number of traders net-short is 2.84% lower than yesterday and 17.10% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bullish contrarian trading bias.

EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (January 2021 to January 2022) (CHART 3)

EUR/JPY rates failed to achieve their double bottom target at 131.92, and with the pair breaking back below their daily 21-EMA while seeing fresh monthly lows, a more bearish move seems likely in the near-term. Momentum indicators are quickly turning lower, with daily MACD issuing a sell signal (albeit above its signal line). Daily Slow Stochastics are dropping from overbought territory. The 50% Fibonacci retracement of the 2014 high/2016 low range at 129.50 is the first target lower,…